Unravelling financial inclusion in India

Financial inclusion has been recognised as a key building block which will form the foundation for achieving several of United Nation’s Sustainable Development Goals. Access to the right financial tools is a key element in overcoming the hard, everyday realities for those who live in penny economies. It can provide them an opportunity to move out of poverty or build resilience to absorb a financial shock without sinking deeper into debt.

India has recently witnessed profound changes in its financial inclusion ecosystem. India has actually been one of the early innovators of financial inclusion — the term itself was coined by RBI governor Y.V. Reddy in 2005. RBI’s original phrase was actually “financial exclusion”. Mr Reddy changed it from “exclusion” to “inclusion”. And it has stuck since because of the greater resonance the fundamental shift in approach found in all sections.

A number of committees have come up with their own definitions of financial inclusion. The classic and most precise definition of financial incision is the one given by the Committee on Financial Inclusion (2008), which was headed by C. Rangarajan: “Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost”.

The World Bank toolkit (June 2018) on National Financial Inclusion Strategy defines financial inclusion as “the uptake and usage of a range of appropriate financial products and services by individuals and MSMEs (micro, small and medium enterprises), provided in a manner that is accessible and safe to the consumer and sustainable to the provider.”

A succinct working definition that incorporates the financial inclusion objectives of different countries can be articulated this way: it is the effective access to and usage of a range of quality, timely, convenient and informed financial services, which include savings, credit, remittances and insurance at affordable prices to enable users to manage cash flows and mitigate shocks. These should be delivered by formal institution through a range of appropriate services with dignity and fairness and are normally complemented by appropriate financial education that enhances financial capabilities and rational decision-making by all segments of the population.

Access to financial services has a critical role in reducing extreme poverty, boosting shared prosperity, and supporting inclusive and sustainable in the absence of proper formal financial systems they have to rely on informal means of managing money, like cash-on-hand, family and friends, moneylenders, pawn-brokers or keeping it under the mattress. These choices are expensive, insufficient, risky and unpredictable.

The first step in integration is identifying the financial needs of the people. These needs can be broadly classified into three main categories: life cycle events, emergencies and opportunities. The first deals with the needs arising due to events like birth, death, marriage, education, old age and inheritance; the second comprises of personal (for example, accidents, illnesses among others) as well as impersonal (mainly, natural disasters) emergencies and lastly, the third refers to the ways of enhancing one’s living standard by acquiring assets like land, housing, consumer durables (like television, refrigerator and such).

A transaction account then acts as a means of fulfilling these needs. Further, by becoming account holders, people are more likely to utilise other financial services like credit, investment and insurance, which can improve the overall quality of their lives. However, the context of poor people becomes a major factor in financial inclusion. To harness the full potential of financial services, people with low incomes require products that cater to their contextual needs. This requires attention to issues such as quality of access, affordability of products as well as supply-side sustainability and extent of outreach of services.

However, inclusive finance does not require that everyone who is eligible uses each of these services, but they should be able to choose to use them, if they so desired. To this end, strategies for building inclusive financial sectors have to be creative, flexible, and appropriate to the national situation and if necessary, nationally owned.

We now have reliable systems of measuring and monitoring financial inclusion. The main types of indicators to consider when measuring financial inclusion are:

• Access indicators reflect the depth of outreach of financial services, such as the penetration of bank branches or point of sale (POS) devices in rural areas, or demand-side barriers that customers face to access financial institutions, such as cost or information.
• Usage indicators measure how clients use financial services, such as the regularity and duration of the financial product/service over time (for example, average savings balances, number of transactions per account, number of electronic payments made).
• Quality measures describe whether financial products and services match clients’ needs, the range of options available to customers, and clients’ awareness and understanding of financial products.

Meaningful financial inclusion is very challenging and tough, involving a complex interplay of factors, viable business models and significant behaviour change by new account holders. For certain segments, regulatory frameworks, legal and cultural norms and distance represent significant barriers. We have to be realistic about how long it will take to fully address these challenges. We now have a whole slew of providers that are beginning to find firm roots.

Progress will happen, but certainly just not according to our wishful time frames. Low-income people need contextualised and customised services on account of the peculiarities of their financial lives, particularly their irregular/volatile income streams and expenditure patterns.

Financial inclusion is not a one-time process. It is requires concentrated and sustained efforts from all stakeholders, including central bankers, regulators, supervisors, policymakers, financial consumer protection agencies, financial services provider and the community at large.

What we need today are innovative solutions that can take into account the peculiarities of the people at the bottom of the pyramid. We need to use our natural powers of persistence, concentration, insight, and sensitivity to do work, think deeply, and solve problems. Social innovation is taking place at multiple levels, driven by passion and is making a great difference to our societies. But as with most trumpeted interventions, our programmes are also scrambling to turn rhetoric into reality. A lot of lessons have already been learnt from around the world. We don’t have to reinvent the wheel. The learning curve in the digital world is certainly steep, but regulators and policymakers can learn from those who have achieved impressive success in digital financial inclusion.
The most wise credo for all players in the financial inclusion ecosystem can be found in RBI governor Raghuram Rajan‘s conceptualisation of what inclusion should be. “Simplicity and reliability in financial inclusion in India, though not a cure all, can be a way of liberating the poor from dependence on indifferently delivered public services and from venal politicians,” he said. Further, “in order to draw in the poor, the products should address their needs — a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the money lender, easy to understand life and health insurance and an avenue to engage in savings for the old age.”

The steps to the financial inclusion pyramid are quite steep, but given our determination, the climb can be made easier and we can put the pyramid on it head. It is really heartwarming that financial inclusion initiatives are now in a mission mode. This is bound to have ripple effects on other sectors. We are certainly in for challenging and exciting times and to paraphrase Nobel Prize winning author, V.S. Naipaul, India’s financial inclusion space is heading now for a billion mutinies.

The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com